Fed Proposes Greater Transparency in Stress Testing Framework
The Federal Reserve Board ("Fed") proposed changes to the 2026 stress test and broader reforms to enhance the transparency and public accountability of its stress testing framework.
In the rulemaking, the Fed proposed to:
- Enhance Transparency of Stress Test Models by publishing comprehensive documentation — that details equations, variables, assumptions, and rationales — for public comment. The proposal would codify a formal process requiring public consultation on any material model changes and on the annual stress test scenarios before implementation.
- Revise Scenario Design and Process by publishing scenarios for public comment before finalization.
- Modify the Global Market Shock by reducing the number of modeled risk factors from more than 20,000 to approximately 2,300, focusing on those most relevant for assessing market risk.
- Update the FR Y-14 Reporting Requirements by streamlining reporting requirements and eliminating the need for firms to submit extensive qualitative supporting documentation—a change expected to reduce submissions by more than 10,000 pages per firm on average.
The Fed stated that comments on the proposal are due on or before January 22, 2026.
Fed Chair Jerome H. Powell said the proposals advance the Fed’s commitment to greater transparency by requiring public comment on stress test models and scenario design changes.
Fed Vice Chair for Supervision Michelle W. Bowman said the proposals mark a long-overdue effort to improve transparency and accountability in the Fed’s stress testing framework. She acknowledged that the reforms were prompted by litigation threats but argued they are necessary to address persistent issues with limited transparency, volatility, and the lack of an appeals process. She emphasized that publishing the models, scenarios, and design framework for public comment will strengthen due process, improve the reliability of supervisory tools, and enhance confidence in the fairness of the stress test system.
Fed Governor Michael S. Barr warned that the proposal would weaken the credibility and rigor of the supervisory stress test. He argued that disclosing and routinizing the models would (i) "ossify" the stress test and erode its flexibility; (ii) pressure the Fed to lower bank capital through one-sided industry feedback; (iii) enable banks to game the models and shift into riskier assets; (iv) reduce management capital buffers; (v) constrain scenario design and blunt emerging-risk detection; (vi) weaken banks’ independent risk management; (vii) foster a "model monoculture" and systemic concentration; (viii) make the models less conservative and risk-sensitive, lowering capital; (ix) prematurely reveal model details without adequate analysis or coordination with other capital reforms; and (x) impose unrealistic operational burdens that could undermine the stress test’s effectiveness.
Fed Governor Stephen I. Miran said that opening the models and scenarios to public scrutiny will strengthen trust, accountability, and regulatory quality over time. He welcomed feedback on the design and calibration of the 2026 scenarios, cautioning that the current assumptions appear implausible.
Fed Governor Christopher J. Waller noted that greater transparency will strengthen accountability, fairness, and confidence in the Fed’s stress testing process. He emphasized that stress testing remains a critical tool for assessing large firms’ capital adequacy under severe conditions and for setting risk-sensitive capital buffers.